The new direct tax code proposes to exempt the general tax payer from paying income tax if his income is Rs 1,60,000 in a year. He would pay just 10 per cent up to Rs 10 lakh, 20 per cent beyond that and Rs 25 lakh and 30 per cent beyond Rs 25 lakh. Though it looks green on the outlook, need to see and evaluate the details before concluding it to be a great one! The code also proposed to increase tax deduction on savings to Rs 3 lakh. However, one good thing is it will bring down the tax amount by a huge margin for all.
It further proposes that retirement benefits be exempted from tax, only if saved in Retirement Benefits Account. Here is a list of salient features in the new draft.
- Maintains tax exemption at Rs 1.60 lakh income a year
- 10% tax on income of Rs 1.6-10 lakh
- 20% on income over Rs 10 lakh up to Rs 25 lakh
- 30% on income beyond Rs 25 lakh
- all direct taxes including FBT and income tax would be brought under one code.
- Corporate Tax rate to be 25% against 30 per cent
- Wealth Tax to be levied on wealth over Rs 50 crore
- Abolition of Securities Transaction Tax
- Re-introduction of long-term capital gains tax
- Raising of tax deduction on savings to Rs 3 lakh
Probably the code will become law by 2011, which will be the golden jubilee of the Income Tax Act (1961). Former finance minister P Chidambaram had initiated the work on new code and he didn’t forget to mention in the press release that this was a brand new code written from scratch. Only thing I wish after this is implemented is to see no defaulters 🙂 Punish them badly if anyone defaults even after such moderate taxes. I certainly feel it is a good one with little known details as of now. What is your take?
PS: You can share your thoughts on this proposal directly on Indian finance ministry site. Thanks to Sanjay for sharing the link.
Sandeep says
please let me know i.e, if company purchased sodoxo meal passes for the employees, then if service tax will attract? if attract comes under which type of service and what is the rate of service
rajesh says
@ mohan
i think there is a confusion about the slab you have mentioned. it does not confirm to the direct tax code bill tabled in Lok Sabha (bill 110 of 2010).
The tax rates and slabs have been modified. The proposed rates and slabs are as follows:
Annual Income Tax Slab
Up-to INR 200,000 (for senior citizens 250,000) Nil
Between INR 200,000 to 500,000 10%
Between INR 500,000 to 1,000,000 20%
Above INR 1,000,000 30%
Tax saving based investment limit remains 100,000 but another 50,000 has been added just for pure life insurance (Sum insured is atleast 20 times the premium paid) , health insurance, mediclaims policies and tuition fees of children. But the one lakh investment can now only be done in provident fund, superannuation fund, gratuity fund and new pension fund
somanayak says
hi thank u for inforamation
Sushil Gupta says
Hello,
I would like to know the minimum number of employees for the PF scheme.
Thank you…
Drprab says
Has anyone reviewed the proposed changes.
Looks like they have reverted on EET’s on PPF / Insurance and House loan interest exemptions ? not sure about the tax brackets.
Satyanarayana Raju says
The new policy of the Govt going to be intriduced is very good. Scope for saving will be raised and directly help the Govt to make use of the funds The policy will benifit the people to minimise taxes. But the Evasion rate may not be minimised.The Govt has to take serious steps to raise its income by introducing policy to raise the assessees number. I am going to put the following few sentences for reference how the the people are escaping from filing returns before the Income Tax Authorities
1.The state Govt revenue departments are playing crucial role in minimising the Turnovers of the Enterprenuers there by helping them to decrease the income levls which helps the Income Tax revenue.The sales Tax Authorities are collecting their Taxes on the purchases made from unregistered dealers.This system should be tightened thru asking them to file un registered dealers list to the central authorities.
2.People are investing huse amounts in their businesses in the shape of Rental advance to the business premises not disclosing the facts in their returns. To minimise this type of practice SOURCE ASSESSMENT Procedure has to be introduced by the Income tax Authorities . The Govt has to tighten the departments who are responsible to issue registrations to statrt businesses to issue registrations only after submission of Source Assessment Order Copy
shakthi says
Though the new tax code is beneficial to ppl earning income upto 10 lac, it hurts real bad for all those earning between 1.60 lac and 3 or 4 lac (say), as there is no change in the tax slab and worse there is no more exemption on housing loan repayments. Expanding 80c isnt going to help this group as one earning 3 lac cant invest 3 lac to claim relief and hence goin to end up paying more than what someone who earns way ahead than him/her. FM cant simplify the tax code by making it inequitable as it clearly burdens the lower middle income group.
R Saraswathan says
While the broadening of slabs is a welcome shift, the treatment meted out to Senior Citizens who are only dependent on Income from investments needs some consideration. If you see the overall percentage of Income Tax on ones Gross Total income the disparity between low income group (Sr.Citizen in particular) and others will become clear. To remove this the Finance Minister should eek out some special provision for exempting the Income of Sr,Citizens vis-a-vis other assessees. As we have seen the lowering of rate of Tax has always resulted in better compliance and this should encourage the FM to bring the marginal rate of Tax further down.
Indranil says
Will a person get the tax exemption on pre-existing Housing loan after implementation new direct code in 2011?
Please advice, I am planning for a Housing loan this year.
Mohan says
Indranil, there have been mixed reactions and looks like the draft is being modified based on the inputs from various sources including banks and tax payers. The another rumor is that the interest on home loan might be included and the limit might be extended to 2.5 lakhs. We cannot assume anything at this moment. Even if they offer home loan provision, it will only help the people who are getting salaries more than 20L, that too marginal! If you consider the amount of interest you would end up paying against the tax, I think tax is much lesser than the interest.
So the thumb rule is, if you have enough money, don’t borrow from Banks. If required to borrow, go for only the minimal amount that is needed instead of going for higher amounts and ending up paying devastating interests un-necessarily.
Mohan says
Attention everybody : The new Direct Tax Code (DTC) will be rolled out from April 1st of 2011. Finance minister just announced that in the Budget speech.
Santosh Puthran says
The Direct Tax Code 2009 is welcome proposal. However role of Accountant has not been defined given the fact IT department do not hold them responsible, if the fraud is detected.
I feel the provisions of Tax Audit and Accountant should be removed from the Direct Tax Code Bill since the provisions of Act are self contained for assesses to understand and file their returns. However if they need help, they should take help of professional accountants either in practice or in service.
Raymond Cardoza says
Nice Post still now i was safe from Tax cant Say next year
C.A Raj Kumar Agarwalla says
It is a good news for Salaried persons as well for Corporate but I fail to understand why individuals will be charged with a higher tax rates of 30% When Corporate tax rates will be @ 25%. whereas Corporate gets all its expenses as deductions without having any limit before arriving its Income but In case of Individual only small kind of deductions are available like conveyance Rs 800/- & HRA etc, which all has one threshold limit. Again If Individual buys any product for his personal use out of his own Income (which has already incurred Income Tax) on product also he has to incur sales Tax, service tax Excise Duty, Custom Duty for which no input credit available for him but In case of Corporate availing Input Credit is possible. I would like to suggest instead of higher 30% tax rate it can be limited to 25%.
Again I would like to say, there should be a provision for 100% deduction of interest (Including any Insurance Premium charged by the bank) paid on housing loan for self occupied house. Because if a self occupied own house is there with a salaried person in a same city where he is working then he is not eligible for HRA deduction. And Income tax allows for interest and principal repayment deduction including other investment upto 1 lac as deduction. According to the current market rate 8% for home loan you can avail max 12.5 lacs Home loan. Which is not enough to buy a good home. And think about those people who has bought their house at higher Interest Rate @ 11% or more and bank has not matched near to current market rate. So by putting a threshold limit of 1 lac, act has not provided enough scope for Individual to plan either for new house or for other investment. Again people under 25 lacs or less income will not be able to get better benefit from home loan. Also think about those people who are self employed and are not eligible for HRA. It is good to hear that now 1 lac has become 3 lacs but still I would say it should be excluding interest on Housing loan, which should be allowed as deduction without any limit.
Sanjay says
Have added a review on my site. Invite you to read and share your opinions. Just click on my name here. Hope, you don’t mind Dear Mohan, Idea is to promote views w/o occupying too much space here.
Mohan says
Thanks. Wish you had shared your opinion too here instead of just trying to promote your blog. People already know how to reach blogs through comment author urls. You don’t need to explicitly mention here!
Sanjay says
Sure Sir. Idea was to avoid a half-page length on your page 😉
Here it goes:
Some Highlights of Draft of new Tax Code proposed in July-August 2009 and what I feel would be better:
Maintains tax exemption at Rs 1.60 lakh income a year: I personally feel that there should be no zero tax limit. Everyone MUST pay tax, however little it be, say 3-5%. If somehow, tax collection cost can be curtailed, then this segment should end up contributing maximum to the coffers of the Taxmen. Imagine, there could easily be 5 Crore people earning an average of around 1 lakh per year. If somehow, tax can be collected from these people (say at a rate of 4% i.e. 4,000 per person) then we end up collecting 20,000 Crore per year.
10% tax on income of Rs 1.6-10 lakh: This is the range within which maximum people change their lifestyle, get financial freedom between the two ends of the spectrum, sensitivity towards paying tax changes altogether -and therefore slab change of tax should appear somewhere here in between, say at around 4-5 lakhs -from a rate of 4$ to around 12-15%, maybe creating two slabs herein.
20% on income over Rs 10 lakh up to Rs 25 lakh: What is the point of imposing a higher slab rate at Rs 25 lakhs in India in current scenario. Most people around this range become comfortable paying tax at any rate -provided it is reasonable (and I personally find a 30% tax rate to be excruciating that too when one is charged with toll taxes, service taxes and sales taxes on almost everything he buys. So typically one ends up paying 30% plus another 10% tax on his income for every rupee spent. So, I suggest hitting the highest tax slab in the middle of this range and that should not be more than 20-25% as one is anyway going to pay tax at every consumption point -especially with GST kicking-in sometime soon.
30% on income beyond Rs 25 lakh : Maybe idea behind bringing in a higher rate was to bring in a long-term vision. But this could be done by linking the tax slabs to a CPI or WPI with rounding-off rules. Ths itself should shave-off a couple of Crores from expenditure which the MoF (or perhaps some other Ministry) would spend on an average on each Budget item.
All direct taxes including FBT and income tax would be brought under one code: Am foxed on this one as I don’t understand legality of the same. FBT is already out and perks tax is back. I was all for FBT as it legalised individual tax saving by providing a lower tax rate on an individual’s exemption which’d now be taxed (any allowances not being under tax net should soon come under it
Corporate Tax rate to be 25% against 30 per cent: WHY? I mean why a lower tax rate for Corporate and not for individuals. And Corporate are anyway eligible for all expenditures unlike an individual who doesn’t even get more than Rs. 800 for conveyance and 1250 for medical with almost nothing for food (unless its Sodexho etc which you don’t use for your daily meals usually). And also, when it is amply clear that small businessmen would never want to pay such a high tax rate then why not create slabs here too like zero or upto 5% tax rate (I am never for zero though) for businesses with turover upto 1-5 Crores, a higher rate for businesses with turnover upto 25-50 crore and so on (Laffer was not laughing when he proposed intermediate rates efect on compliance). I am sure, small busineesmen would love to pay tax and get away with Democle’s sword hanging upon them all the time.
Wealth Tax to be levied on wealth over Rs 50 crore: Again, a very futuristic feature. At 1 Crore, people don’t mind taxes (rhetoric: provided they are reasonable)
Abolition of Securities Transaction Tax: So that the Rich don’t become poor? or to make a rickshaw-wala spend his day at some stock exchange instead of going to earn. A totally lobbied move. I am a big time punter yet would never say yes to abolition of tax on securities trading. Because this is done by typically rich people -who have time and energy or resources to devote more resources intot rading. A low rate would surely promote volumes and increase tax too but why “Zero”. Talk about multiples of a low fee income per transaction and watch it grow.
Re-introduction of long-term capital gains tax: The only thing which provides stability to a nation’s income is long-term investments -be it into real estate or insurance or PPF. Once again, totally out of sync. Abolishing tax on security trading and introducing tax on long-term investments. Promote speculation and ruin investment habit. Follow the west and doom before you bloom. Wouldn’t say more on this.
Raising of tax deduction on savings to Rs 3 lakh: Somehow, something sagacious here. Need of the hour is medium to long-term savings. Average Indian is still poor by international standards and therefore needs to dip into his savings every once in a while be it for a marriage, education, big investment (say a car or a house etc) and a tax break on 3-5 year horizon investment product provides him incentive to save and add to GOOD consumption in economy. An EEE regime would add strength to it. If you can remove tax on securities trading then why not continue with EEE regime (i.e. tax Exempt at the time of investing, earning/accumulation and withdrawal stage hence 3 times E).
Mohan says
Great depth of details on implication. Thanks for sharing 🙂
Sanjay says
Haven’t worked on my blog for sometime. Good discussion here, maybe will write on it soon. Nice blog.
My 2 cents: India (and China and the likes) are leaders in personal savings (at almost 28%) have been an example for the developing countries. Credit cards and personal loans are already trying to change that and now by taking away many investment options with this code, people shall be disincentivised to save.
FM should not forget that it’s these savings which form a large part of their demand for funds for development.
jayam says
I think it still doesn’t gives much benefit, remember the fact the exmptions are no more there and no interst on Home loans will be exmpted from taxation,
meaning for 10 Lakhs currently 1.6-3 -> 14ooo,3-5->40000 5-10->75000 sums to 129000 tax levied , but this is for a person getting salary of about 15L considering exemptions like 1.5L(interst on housing) + 1L saving + 40000 (exemption on food,commutation,medical bills) so 4.6 L.
If this exemptions are not there then as per proposed method , a person getting 15L would pay 1.6 -10 ->84000 + 10-15L -> 1L meaning would end up paying 184000 instead of 129000.Please correct me if I am wrong
Mohan says
Jayam, what you have mentioned is right, but the fact is all these banking institutions would let the government to implement this proposal in its current form. I am hoping some exceptions will creep in by the time the final shape it takes.
Vinay Kiran says
Hello Mohan, its nice to see a fellow Bangalorean on the web. I got to know you from Seema’s blog. I would like to contact you but could not get to find you contact details. Why dont you update your blogger profile with e mail id and interest. I am sure you can drive more traffic to your blog with that.
Mohan says
Hi Vinay, thanks for dropping in and trying to reach me. There is a contact page at the top above header through which you can either chose to chat with me or even send me a mail! Welcome to my blog 🙂
DrPrab says
I was curious if there is a website where we could convey our thoughts to the govt on these changes
Mohan says
DrPrab, sorry – couldn’t find a link where in we could share our thoughts with right folks.
Sanjay says
This link invites comments / suggestions, doesn’t share in public. Wonder if anyone reads any 🙂
Mohan says
That is a nice info you have shared! Not many know this link. Let me update the original post with this link.
Seema Syed says
Thats quite good measure taken by the government, that shall definitely help many. It definitely matches with the tax reforms what Germany has proposed which if everything goes well shall become a law from 2011.
Mohan says
That is pretty much the expectation from most of us too. But the proposed system has few concerns as some of the readers have pointed out. Hope all of them get ironed out by the time the proposal gets its final shape.
Dr Prab says
I am a bit concerned of Income earned via Fixed deposits . If I read this correctly , we cannot use the basic exemption for the interest earned from fixed deposits . It will hurt folks who do not have a pension plan but depend on FDI for a source of income. I think these new rules needs to thought over
Mohan says
Dr Prab, many of the readers have expressed the similar concerns for senior citizens. Hope the govt takes some modifications before finalizing it.
Kalyan k says
Times of India article indicates this draft affects NRIs pretty badly.
http://timesofindia.indiatimes.com/news/india/NRIs-treated-as-Not-Required-Indians/articleshow/4979439.cms
Many of the clauses for NRI sounds pretty stupid.
S. N. Vaidya says
Dear Mr. Mohan,
I am a retired person and I save money and reduce my I Tax throu0gh PPF. I saw your reply that saving in PPF will not be taxed until 2011 which is heartening. Please confirm.
I understand that the limit for savings under Sec. 80C has been raised to Rs. 150,000. What is the break-up in PPF, Mutual Fund, and Fixed Deposit. Please email the reply to me as well.
Thanks
S. N. Vaidya
A.K.Mishra says
After spending money for the eductiion of two children and after paying the house rent , even though income is about Rs.2 lacs, nothing is left for me to deposit in any scheme. Why the govt.is not considering the minimum provisions for such people.It seems the govt.is interested to give benefit to the higher income brackets. Those who are unbale to construct their own houses are being taxed. Why not instead of giving tax benefit on interest on housing loans the govt.pass on such benefit to every one,even non tax payers who are constructing houses of their own without taking any loan from Banks. It is also a matter to help the rich people only. Nothing is available for the lower strata of the tax payers.I have calculated they are being taxed @50% ormore if you calculate different factors in this new law.
In my opinion,there should not be any benefit for savings>it is no point in not making interest now and charge them when they withdrw. The interest benefit on housing loan should go. If the Govt. wants, then this benefit should be passed on to every house builders or you can subsidise the interest direct to the Banks.
Already deposited amounts for savings may not always be for tax gains. May be his hard earned money. How can the person proove after 10/15 years that he paid the tax on the deposit.There are such anomolies, whioch should be looked into
Lakshmanan B says
The information available on IT law changes is so far so good. As our previous experience tells us, we need to wait and see what gets unfolded when the Draft becomes Law.
Just because of prohibitive Income Tax, I still continue as NRI. When this draft becomes law which does not suck the citizens, many technology experts are likely to return which will benefit the nation in a long run.
Let us wait for few more months and see what is being done against what is being promised now!
sn says
it is pity that the PF contribution ( so called retirement benefits for non-pensioners)will also be taxed at any point in time, in the new tax proposal
Mohan says
True, that is the major concern for most of the working class people right now.
Bhavin Patel says
This Tax structure is going to help India Inc more compare to individual; The thing for an individual is like plant a mango plant, water & feed that plant but at the time of ripping the mangoes give sufficient part of mangoes to Government. This is in the case of long term capital gain; the individual is going to take a risk in equity, etc. & Government will come at the time of ripping & look for its part. This structure should be need some correction; if government says “Aam Aadmi ki Sarkar” then it should take care of “Aam Aadmi” not just Corporate Inc.
Karan Batra says
The same had happened in 1995. The govt had tried to bring new tax laws. But nothing happened except debates in the parliament.Eventually after 7 years only 4 provisions of the prposed act were chosen and applied to the existing Income Tax Act of 1961. The same will happen again
Mohan says
I beg to differ with you on this. The government and the concerned minister including the former minister are very clear with their views on this and I am sure, this will be presented in the very next parliament session. This kind of radical change in the tax system is a must to ease out the un-necessary confusion in the current act.
Thanks for your views though!
chhaterpati says
this proposal is good only for high salary class person & penic for senior citizen
G U Naveen says
I think this is a good move from the Govt by changing the slabs for Income Tax. Most of the salaried class fall under the below 10 lakh category. This will benefit all the middle class.
Mohan says
Yeah, lets hope the new act comes out clean without any hidden hooks 🙂
annapurna says
The exemption slabs are on bebeficial side as compared to previous year exemption slab. It is more helpful to the salaried class of assessee. For the senoir citizens the mechnisam of investment should work with exemption , exemption and exemption and not with exemption, exemption and taxation. The deductions for housing loans interest should be allowed who has already invested in previous years.
As the exemption is allowed for iinvestment upto rupees three lakh, there should be different kinds of investments like NSC, LIC where the interest and the fund should not be taxed at later stage and there should be other kinds of private investments where the exemptions can be claimed but it will be taxed at later stage.
let us wait for the final budget
Mohan says
I still have a question. The money that we invest in savings is from our income is already taxed. I don’t understand why the government wants to add tax on the money which has been taxed already!
The experts in the draft panel should seriously give a thought on various classes in the new draft. Otherwise people end up paying double taxation!
sn says
FYI – the interest accured (when you invest your (taxed) money, say, FD, etc.) will be taxed and not the principal
Kavitha says
After reading the outlook draft it only seem to benefit us marginally. I am happy that the tax calculation and filing procedure becomes simpler with the new act. Hope to see wider base to fall under the income tax act.
Mohan says
Yes, there will be lot of additions and removals before it takes the final shape. Let us wait and see what all tweaks it goes through!
Shiv Kapoor says
It is not that great. The new system shows green picture in some areas while red in some other. For example, the new direct tax proposal will tax savings as well. So taxman is going after small savings too. It means PPF, PF, Pension would also be taxed. This is going to hurt a number of senior citizens too.
Mohan says
Yes, that is a very valid point. However given the kind of moderate tax being levied on salary, It will be welcomed. However, the senior citizens who rely on their pension will panic for sure. Even then, the good news is that the money deposited towards these instruments after 2011 will be taxed and not on the investments which are in place already 🙂
Ritesh says
This is a fantastic news for salaried class people. Good to see that our government bodies are really looking at rationalizing the decades old tax system!
One sad thing is it will not help those who plan to go for home loans. The current proposal plans to remove the interest paid towards home loan to be excluded from tax benefit.
Ritesh says
This is a fantastic news for salaried class people. Good to see that our government bodies are really looking at rationalizing the decades old tax system!
One sad thing is it will not help those who plan to go for home loans. The current proposal plans to remove the interest paid towards home loan to be excluded from tax benefit.
Mohan says
It is only a draft as of now. So wait till the final touches are made to this code. Many things can change by the time it is implemented in 2011. Banking companies will lobby for sure to find some provision for home loans.